Mahindra & Mahindra (CMP: Rs1,449) |
Mkt Cap: Rs900bn; US$13.5bn Bloomberg code (MM IN) |
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1QFY17 result highlights · M&M's Q1FY17 Adj PAT of Rs 8.6bn (up 2% yoy) was broadly in line with our estimate of Rs 8.5bn. Lower than estimated revenues were offset by slightly higher than expected EBITDA margins. · M&M's revenues at Rs110bn (up 12% yoy) were a tad disappointing as realisations declined 5% sequentially largely on the back of an unfavourable product mix (higher share of lower priced vehicles KUV1oo and TUV3oo). EBITDA margins at 11.6% (down 110bp yoy) were the result of the divergent trends in the farm equipment and auto segment. While tractor margins were at multi-year highs (EBIT margin 18.7% up ~100bp yoy), the profitability of the auto division (EBIT margin 4.9% down ~370bp qoq) was extremely weak. The tractor business profitability benefitted from higher volumes whilst the auto division was impacted by a poorer product mix, heightened competitive intensity and the lapse of excise benefits. Concall highlights: (a) The management raised the tractor volume growth guidance to mid-teens for FY17 (previously 10%) on the back normal monsoons (b) M&M has gained marketshare in the tractor segment partially due to the success of the new launch, the Yuvo. (c) The competitive intensity in the UV space remains high whilst it is more benign in the tractor segment (c) M&M would be launching the petrol versions of the Scorpio and XUV over the next 9-12 months. Key positives: High EBIT margins for farm segment Key negatives: Low auto segment EBIT margins, weaker realizations Impact on earnings: We increase our FY17/18 EPS estimates by ~2% each with lower realisations being offset by higher margins Valuations & view M&M would be a key beneficiary of an improvement tractor demand - its recent marketshare gains in the space are an additional positive. On the UV space, while we expect headwinds with increased competitive pressures and a structural shift towards petrol vehicles; we believe the impact could be mitigated by the introduction of petrol engines. The reasonable valuations (ex subsidiaries at ~12XFY18E earnings) provide comfort. Given the improving prospects for the high margin tractor business, we increase our target multiple to 14XFY18E (previously 12x) for the core business to arrive at a target price of Rs1610. Outperformer. |
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